INTERNATIONAL BUSINESS

European Monetary Union Hits a New Round of Snags

By JOHN TAGLIABUE

Published: August 30, 1996

ROME, Aug. 29—
Nervousness over the prospects for European monetary union spread this week, as Governments in France and Italy faced increasing pressure to avoid a slowing of their economies by extending the timetable for introducing a single currency.

Speculation that Europe would not meet the target of 1999 for the first stage of monetary union, as laid down in the Maastricht treaty of 1991, was bolstered by comments by senior German officials, including Chancellor Helmut Kohl, suggesting the possibility of a slower schedule.

German monetary officials have previously been adamant that the criteria for a single currency should not be diluted.

But stagnating consumption and rising unemployment have put Europe's house in disorder, threatening the Maastricht timetable.

Of the 15 members of the European Union, only Ireland, Denmark and Luxembourg currently meet the Maastricht treaty's criteria on budget deficits and on public debt. And any monetary union that excludes France and Germany would not be considered meaningful.

In France today, thousands of angry farmers erected blockades in the early hours to block the delivery of beef in protest over falling farm prices.

The action by the farmers appeared to give a foretaste of labor unrest that many union leaders and Government economists have been predicting would be organized this fall by opponents of austerity measures envisioned by the French Government in accordance with the Maastricht criteria.

Indeed, the financial markets have feared such unrest in the last week, sending the French franc down sharply against the German mark. The mark rose as high as 3.4295 francs today, a five-month high, before falling back to 3.4250 francs. Shares of French companies also sagged today on the Bourse in Paris.

But later in the day, President Jacques Chirac pledged that France would meet the deadline for monetary union.

In Italy, Prime Minister Romano Prodi cautioned that his Government might need more time to carry out the Maastricht criteria. In an interview with the weekly Panorama, Mr. Prodi said that while Rome remained committed to Maastricht, it might have to seek agreement with its allies, most notably France and Germany, to establish ''special, intermediate, brief stages'' to meet the fiscal criteria.

Mr. Prodi's remarks came less than a week after Cesare Romiti, the chairman of Fiat, Italy's largest privately held concern, questioned the wisdom of pushing ahead with austerity measures needed to meet Maastricht's schedule. Mr. Romiti, whose company generates the bulk of its profits, if only a small part of its sales, within Italy, argued that the Government should put job creation, as a stimulus to consumption, ahead of the goal of a single European currency. The remarks aroused unusual interest, not least because Italian industrialists had been numbered until now among the most outspoken proponents of a single currency as a way to contain inflation and stimulate trade.

Essentially, economists say, the problem that Governments in France, Italy and elsewhere on the Continent face is that by conforming with the Maastricht criteria for joining the single-currency system -- including rigorous limits on budget deficits, inflation and interest rates, and accumulated debt -- they are stifling consumer spending and dampening prospects for business growth.

Though central banks like the Bundesbank in Germany have assumed the burden of stimulating growth by lowering interest rates, German central bankers made clear after last week's cut in rates that those might be the last for some time.

Speaking in Frankfurt today, the president of the Bundesbank, Hans Tietmeyer, warned that German monetary officials would allow no dilution of the economic criteria set down at Maastricht, which he described as ''important and indispensable.''

Similarly, Mr. Kohl said the single currency would have to come ''at conditions which cannot be diluted, as the trust of the public is at stake.''

On Sunday, Mr. Kohl will meet in Germany with President Chirac for talks that will include the question of the single currency. The talks are considered crucial, since on Sept. 10, the French Government is to present a budget bill for 1997. With the French economy now expected to grow just over 1 percent this year, sharply reducing tax revenue this year and next, planned cuts in social spending are unlikely to move France closer to the goal of a deficit no greater than 3 percent of the gross domestic product, one of the key conditions for entry into monetary union.

In Italy, the Government now expects a deficit of 88 trillion lire, or about $57 billion, for 1997. That is roughly 4.5 percent of expected economic output, compared with 10 percent in 1993.

Italian inflation, another criteria imposed by Maastricht, is now at 5.4 percent. But this has come about largely thanks to an almost total standstill in consumption. Reflecting these concerns, Mr. Prodi said the primary goal of his 1997 budget would be ''to enter into Europe.'' But he added, ''Not with a dead country, with an economy on its knees.''

The Maastricht timetable, he said, ''must be interpreted and discussed in an atmosphere of European solidarity'' that included ''looking the French and Germans straight in the eye.''

Pressure is growing on European leaders to reach broad agreement before finance ministers gather in Dublin on Sept. 21. There, they will negotiate some of the next concrete steps toward monetary union, including sticky issues like a temporary exchange-rate mechanism linking European currencies to replace one that collapsed in 1992 under a wave of currency speculation. Italy, Britain and Sweden are no longer part of the European exchange-rate system.

The finance ministers will also try to negotiate a legal framework both to enforce budget discipline and to insure continuity of payments under contracts established in national currencies once the single currency has been introduced.